Concerns over the general trend of sustained rapid credit expansion in Kazakhstan (foreign currency, BBB-/Stable/A-3; local currency, BBB/Stable/A-3) are exacerbated by banks’ growing international and interregional exposure, especially in riskier neighbouring countries such as Russia and Kyrgyzstan, Standard & Poor’s Ratings Services notes in a report entitled Heightened Risks For Kazakh Banks From Fast Growth And Interregional Expansion.


“With stabilised inflation and fierce domestic competition, the main factor driving this loan growth is the tightening interest margin, particularly on corporate lending,” says Standard & Poor’s credit analyst Magar Kouyoumdjian. Although these risks are somewhat mitigated by several factors, including improving regulation and supervision of banks, and their higher sophistication, the level and rate of increases in lending and net external liabilities are symptoms of rising leverage in a banking system and can be indicators of potential financial system stress.


The system’s loan volume has risen on average more than 50% annually in the past couple of years, with growth being much higher at the larger banks, for example, by 72% at Bank TuranAlem (BTA; BB-/Positive/B) in 2004 on top of an 85% growth in 2003.


This can be attributed to fast economic growth led by the oil and gas, agriculture, and construction sectors; as well as the emergence of the small and midsize enterprise (SME) and retail credit market, the latter being the product of a drive to diversify the economic base and of a growing middle class.


There has been substantial investment in Kazakhstan’s raw material resources in recent years, which has boosted the local economy, thereby increasing the demand for corporate credits.


Furthermore, there is a boom in construction associated with the new capital city, Astana, and the government’s emphasis on housing projects. The latter is also fuelling retail lending, particularly mortgages. Although 70% of lending is to corporate clients, retail credits are growing at a faster pace. With underdeveloped capital markets, banks still fulfill the main financial intermediary function in Kazakhstan and make up the primary channel of capital distribution.